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Feb 1, 2024

Insights From ETFs Top performing ETFs in 2023 and which segments of the market are expected to do well in 2024

by Michael Huynh

What happened in 2023

2023 was another roller-coaster year for investors in the stock market. The scary headlines range from persistent inflation, the fastest rate hikes in history, to geopolitical turmoil in the Middle East. These negative headlines could test long-term investors’ conviction. 

Despite these, the S&P 500 and the TSX ended the year up. As of December 20, 2023, the S&P 500 and TSX gained around 23% and 6%, respectively. However, the journey to get to where the indices are today was anything but a smooth ride. Volatility especially in the fall especially around October was abnormally high, and then the markets rebounded strongly with surprisingly positive inflation numbers for a few months in a row, leading to a year-end rally. Only long-term investors who choose to sit tight through thick and thin, stay invested, be rational and have a long-term investing mindset instead of speculation and a make-quick-buck mentality, are rewarded handsomely this year. 

We will look at which ETFs worked well last year along with the reasons for such outperformance. For the purpose of this article, we intentionally exclude some cryptocurrency-related ETFs, leveraged ETFs and other ETFs with a high degree of concentration in just a few companies, as we think these approaches would not be considered prudent for typical investors. Here are the top five ETFs that have the best performance year-to-date in 2023.

1. BMO ARK Next Generation Internet ETF (ARKW) 

ARKW is an actively managed ETF focusing on capital appreciation by investing in global companies that are the leaders of next-generation internet. ARKW currently has $1.1 billion in assets under management (AUM), and an expense ratio of 0.88%, which is quite fair for an active fund. The fundís year-to-date performance was approximately 78.4%, handsomely beating both the S&P 500 and Nasdaq. ARKW recovered strongly this year after being down quite hard in 2022, during which the fund was down around 67%. The fund is quite concentrated, the top five largest holdings account for 38.7% of the fund, including Coinbase Global (COIN), Block (SQ), Roku (ROKU), UiPath (PATH), and Zoom Video Communications (ZM).

2. Horizons Global Semiconductor Index ETF (CHPS.U)

CHPS.U’s objective is to replicate the performance of an index that tracks the performance of global companies that are involved in the development and production of semiconductors and semiconductor equipment. CHPS’s year-to-date performance was pretty impressive around 53.7%, due to the Artificial Intelligence (AI) theme this year. The top five holdings consist of Broadcom (AVGO), NVIDIA (NVDA), Taiwan Semiconductor Manufacturing Co (TSM), ASML Holding (ASML), and Advanced Micro Devices (AMD).

3. iShares S&P/TSX Capped Info Tech ETF (XIT)

XIT currently has around $652 million in AUM with total holdings of 24 names. XIT has a Management Expense Ratio (MER) of 0.6% and a year-to-date return of 49.9%. XIT provides investors exposure to the technology theme focusing on the Canadian market, which received less attention from global investors compared to US peers. XIT’s portfolio is heavily concentrated, the five largest positions are Shopify (SHOP), Constellation Software (CSU), CGI Inc. (GIB.A), Open Text (OTEX), and Descartes Systems Group (DSG).

4. Horizons Global Metaverse ETF (MTAV)

MTAV’s main purpose is to provide investors exposure to the publicly traded companies that benefit from the adoption, development and usage of the metaverse. MTAV is a relatively new fund, MTAV was established in November 2021 and currently has $4.9 billion in AUM and a MER of 0.55%. MTAVís year-to-date performance is 49.2%. The top five names are NVIDIA (NVDA), (AMZN), Mastercard (MA), Apple (AAPL) and Meta Platforms (META).

5. Evolve Cloud Computing Index Fund (DATA)

DATA seeks to build a portfolio of global companies that operate in the field of cloud computing, which has essentially transformed the way enterprises and consumers access and save data, leading to cost savings and accessibility. DATA’s year-to-date performance is 46%. The fund has 49 names in total holdings and $18.8 billion in AUM. The top five holdings consist of Salesforce (CRM), SAP SE (SAP), Amazon (AMZN), Intuit (INTU) and Microsoft (MSFT).

Overall, the theme of strong performance this year was heavily dominated by large Big Tech companies which mainly includes the seven largest technology companies consisting of Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG), Tesla (TSLA), Meta Platform (META) and NVIDIA (NVDA). This is primarily due to the fact that these companies are expected to be the main beneficiaries of the development and progress of AI trends in future years. In addition, due to their established, dominant market positions, these companies are considered “safe haven” for the majority of investors. Despite such impressive outperformance relative to the market, these companies are not traded at anywhere close to bubble territory yet, we think these companies will continue to do well and have a significant impact on market indices going forward.

Looking Forward Next Year

There is still a meaningful amount of money sitting in the money market, which is always ready to get back into the equities as long as the macro pictures become more certain. In addition, most of the positive returns this year of the indices are mainly contributed by the “Magnificent Seven” mentioned above, excluding these names, the rest of the market still has a healthy room for positive returns. Specifically, we are especially bullish on interest-rate-sensitive, long-duration assets such as real estate, as well as risky assets like small-cap companies, and highly leveraged industries like utilities, and infrastructure assets.

Lastly, as a consequence of consistent rate hikes in 2024, the Federal Reserve already slowed down the economy meaningfully, and the full effect of the quantitative tightening may not even fully be realized yet. The market consensus now expects both the Fed and the Canadian Central Bank will start implementing quantitative easing policies and cutting rates as early as March 2024 to stimulate the economy again to prevent the economy from the risk of “overcorrection”. For these reasons, looking forward, we expect the overall market will continue to do well from here.

Michael Huynh, Editor of The ETF Fund Update.

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Disclosure: Authors, directors, partners and/or officers of 5i Research have a financial or other interest in XIT and ZRE.